The Formula to Locating, Identifying and Selling any Fund or Firm to International Investors

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The Formula to Locating, Identifying and Selling any Fund or Firm to International Investors

The world of wealth is shifting from North America to Asia-Pacific, which means fund managers need to pivot towards international investors if they want to grow their portfolios.

The latest World Wealth Report shows Asia-Pacific passed North America as the region with the largest group of high net worth individuals. The report credits the expansion of emerging economies for the rapid expansion of wealth overseas.

During my time as Managing Director with Genesis Securities and Lek Securities in New York, I had to navigate this international terrain in search of institutional investors. It wasn’t easy, but along the way, I learned a few business tactics that can help other fund managers reach international investors.

Here’s a breakdown of how I located and identified these elusive investors for potential business deals.

1. Identify Local Banks and Hook Them with Incentives – The local bank in every country is the crucial connector with high asset holders. Any fund or business pursuing international investors must establish relationships with account managers and appeal to their self-interest by explaining how this new deal will make them more profitable.

Many foreign markets have underdeveloped financial services, and the services tend to be offered by one type of institution – the bank. Most foreign investors have local business interests and are actively involved with their bankers. Thus, bankers have access to elusive high-net-worth investors, have working financial relationships with them, and are a perfect conduit for selling your investment or making introductions.

However, in the banker’s mind, a dollar invested outside of the bank is a dollar not deposited. Thus, it is important to incentivize the bank by convincing them that for every dollar their clients invest with you, the bank will make more money than it would if investors kept their assets in the bank.

Identify the spread between deposit and lending rates for a particular country. The smaller the spread, the less of an incentive the bank will need to introduce their clients to you. Countries with very low or even negative interest rates may be attractive.

2. Create a Roadshow or Seminar – This is typically where the deal falls apart because of cultural nuances and an information gap. For example, a business plan for a restaurant that compensates workers through gratuities is easily understandable in the U.S. In Japan, where tipping is uncustomary and impolite, it might need further elaboration.

Ensure that your presentations are in both English and the local language. You need to scrutinize the local translation more than the polished English one. Hire independent and separate editors and translators to recheck your editors’ and translators’ work.

Also, think of local analogies to your business. Don’t think about the products, but the principles involved. For example, when selling a fund that is trading carbon futures on an exchange, analogize to trading deep-sea fishing permits at industry meetings in maritime countries.

3. Establish Credibility – Investor’s care about your address and it impresses them when they recognize a name like Wall Street. Famous areas and buildings carry a lot of weight with international investors.

Information on trends takes a long time to permeate international boundaries. The next hot area in Brooklyn may be very prestigious and signal innovation to the insiders in New York, but investors in Dubai will not be impressed.

When investors look at a financial firm and do not see a Wall Street address, their impression of the reputability of the firm will immediately drop. Luckily, U.S. streets and landmarks are among the most well known worldwide and with the inexpensive availability of office sharing, address sharing, and other tools that provide a recognizable address, there is no need to relocate operations.

4. Form Alliances – Chambers of commerce, professional associations, and industry groups all share one trait – their members are business leaders. Partnering with these organizations will provide access to their members and interacting with them through an allied organization plants the seeds of trustworthiness.

For targeting investors in emerging economies, NGOs are your friends. They tend to know which players are large in each industry and what they are interested in. They have networks in many countries as well. An NGO trying to improve infrastructure in Sudan may bring investors from France. Funds or firms should specifically look for NGOs with a strong presence and long history in the country they are targeting.

5. Industry Specific – Most firms looking for international investors search too broadly, targeting people with the most money. If you are a real estate agency looking for international investors for development projects, target international law firms who are struggling to provide options for their clients. Likewise, hedge fund managers should target admins.

There is a dramatic amount of opportunity in emerging markets. It’s natural that firms are searching for investors overseas, but that brings new challenges. However, if there is a thoughtful plan in place and these investors are strategically targeted, they are absolutely attainable.

Opinion column by Serge Pustelnik. He is currently studying international law at Harvard and is also a legal fellow at New Markets Lab in Washington

 

 

 

Can Brazil Win a Gold Medal as an Investment?

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¿Puede Brasil ganar la medalla de oro en cuestión de inversiones?
CC-BY-SA-2.0, Flickr. Can Brazil Win a Gold Medal as an Investment?

With the Olympic Games underway, many eyes are on Rio. Coincidentally, investors this year are similarly directing more attention to Brazil, although it is developments in the capitol, Brasilia, that are likely of greater importance.

Brazil has had one of the best performing stock markets in the world this year. This may come as a surprise given the headlines we’ve seen this year coming from the country on everything from a presidential impeachment to the Zika virus. But according to Bloomberg data, the MSCI Brazil 25/50 Index is up more than 50% this year, while the MSCI Brazil Small Cap Index has risen over 60%.

The question now is, can the rally continue? My take is that it could potentially, but investors need to be willing to accept significant risk.
Some economic bright spots

First the good news: After two years of a deep recession, the economic fundamentals of Brazil are showing signs of bottoming out. Industrial production has started to turn, and so have sentiment indicators, with business confidence indexes leading the way (source: Bloomberg).
Particularly encouraging are the improvements in the inflation trend. Prices have been easing since early 2016 (source: Bloomberg), and the new central bank committee’s focus on bringing down inflation has also helped lower inflation expectations for the year ahead. This ongoing adjustment has raised expectations of monetary policy easing, namely interest rate cuts in the fourth quarter, which will be supportive of a recovery in economic activity.

Brazilian stocks climb as perception of risk declines

Political vulnerability and stalling reforms

That said, Brazil remains in a fragile situation. Economic imbalances such as weak fiscal accounts, high levels of debt and unemployment need to be addressed. The reforms needed to fix the Brazilian economy are complex and in many instances very unpopular with the public, making this a significant challenge for any government.

But it is political developments that continue to be the main variable in assessing the outlook for Brazil. Most important of these is the pending final vote on President Dilma Rousseff’s impeachment, which will likely happen in late August or early September.

In May, Interim President Michel Temer took office, after Rousseff stepped down to face an impeachment trial. Since then, Temer has had a few successes. In particular, his cabinet appointments were well received by both investors and politicians, which helped strengthen the relationship with Congress. This relationship has been and will be key for the cabinet ability to pass policy measures.

A vote to impeach Rousseff is likely to prompt an acceleration of much-needed reforms, such as cutting fiscal spending and revamping the pension system. Progress on policy changes, in turn, may go a long way towards restoring confidence of both consumers and investors. Nevertheless, while many believe the Senate would follow through with Rousseff’s impeachment, we cannot rule out the opposite outcome, which would likely be adverse for risk assets especially given high market expectations. Adding to the already high political uncertainty: the ongoing corruption and money laundering investigations surrounding the country’s largest oil and gas company.

And there’s the rub: Given the sharp rise in the markets this year it seems that investors are making a bet on the best case scenario. Should that fall through, markets are likely to correct, perhaps sharply.

Things to look for

In short, investors in Brazil have already won a gold medal of sorts this year. Winning another medal will likely require a more prosaic path: a recovery of earnings on the back of the economic turnaround and effective execution on the reform front.

Investors interested in Brazil may want to consider the iShares MSCI Brazil Capped ETF (EWZ) or the iShares MSCI Brazil Small-Cap ETF (EWZS).

Build on Insight, by BlackRock written by Heidi Richardson.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Small-capitalization companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid than larger capitalization companies. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

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iS-18947

 

Markets Should Not Be So Disappointed at Japan’s Policy Measures

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Markets Should Not Be So Disappointed at Japan’s Policy Measures

A year ago, I attended a conference organized by one of our clients, and all the talk was about China, oil, Fed rate hikes and the dollar. Japan was never mentioned. A couple of weeks ago, I attended the same event and there was no other topic of conversation but Japan—zero interest rates, the state of the banks, “helicopter money”, the strong yen.

It’s not difficult to explain the shift in focus. On top of all of those subjects, July 29 saw the announcement of a new set of stimulus measures, 19 days after elections had delivered a stronger mandate for Prime Minister Shinzo Abe’s LDP-led coalition and, of course, his “Abenomics” project. Moreover, there was a growing sense that governments may be getting ready to loosen fiscal policy as central banks reach the limits of effective monetary policy, and that Japan is at the vanguard of this development.

No Eye-Catching Headlines…
That notion took a bit of a hit in the week following the July 29 announcement, however. While the Bank of England managed to surprise positively with its first post-Brexit rate cut and QE boost, the market was disappointed with what the Bank of Japan (BoJ) unveiled. The yen strengthened sharply and Japanese equities swooned. Perhaps all the talk of helicopter money had raised expectations too high.

But there are many things the authorities can do before they have to deploy helicopter money, which as we know by now would require enabling legislation to become legal in Japan, and the new package of policies includes meaningful steps in the right direction.

To start with, the economic stimulus package was big, if not earth-shattering: more than ¥28 trillion, of which almost half would come in fiscal measures. On the monetary-policy side, QE was held steady, rates were kept negative and ETF purchases are set to double.

Other details were arguably more interesting, however. We found out that there would be more coordination between the BoJ and finance minister Taro Aso, for example. There will be a review of the effectiveness of the BoJ’s QE program in September, which might also be a hint of the shift from monetary to fiscal stimulus to come.

…But Plenty of Eye-Catching Details
Fiscal stimulus works best when accompanied by significant structural reform. Again, we see encouraging signs in the new package from Japan. Effective structural reform differs from one country to the next. The U.K. has a flexible labor force, but lacks housing and energy infrastructure strategy; in the U.S., bridges, airports and highways are falling apart and the tax laws are labyrinthine; in Italy, governance needs serious reform.

Japan has no shortage of great infrastructure. It is, however, acutely exposed to the developed-world problem of a shrinking and aging workforce. Effective labor-market reforms can make that shrinking workforce more productive: You can enlarge it by incentivizing people to enter or reenter the workforce, and by welcoming more workers from outside; you can support those unable to enter the workforce to consume more.

The new stimulus package did not contain headline-grabbing helicopters or immigration-policy overhauls, and that might explain why the market has expressed disappointment. But it quietly ticked a lot of these boxes. Wages for teachers are going up, for example, creating more disposable income and investing in future productivity. There are plans to spend more on childcare availability and quality to enable mothers to reenter or remain in the workforce. Tax rules that penalize families’ second earners will come under review, and welfare spending for those on lower incomes will go up to incentivize consumption.

Where Japan Leads, the Rest of the World Follows
What happens if policies such as these succeed where bridge-building and QE have failed?

Japanese government bond markets may have offered a signal. Long-dated bond yields made their biggest jump in three years. It’s a good idea not to read too much into the movements of such a thin market, but we should take this kind of thing seriously nonetheless: With yields at current levels, a drop in principal value like this wipes out almost a decade’s worth of cash flows. The marginal seller was making a pretty clear vote for future inflation. The investors who failed to turn up for the government bond auction on the Tuesday following July 29 had the same thing in mind.

The end game for this unprecedented policy path is far from clear, but it probably includes abandoning the Japanese government bond market to the BoJ’s swelling balance sheet (it’s already on course to own half the market within two years); a plummeting yen; and high inflation gnawing away at the country’s 230% debt-to-GDP ratio. In turn, that could give the government much more leeway for fiscal expansion than seems evident today.

So far, this appears to have been lost in translation for many market participants. But the hints are very real in the recent news out of Japan—and there is no reason to assume that where Japan leads, much of the developed world won’t eventually follow.

Neuberger Berman’s CIO insight by Brad Tank

An Inflection Point For Emerging Markets?

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¿Punto de inflexión en los mercados emergentes?
CC-BY-SA-2.0, FlickrPhoto: Darron Birgenheier. An Inflection Point For Emerging Markets?

Historically, commodity prices and emerging market assets have been closely correlated. This was true in the secular commodity bull market of the 2000s and has continued to be the case in the subsequent commodity market bust beginning in 2011. While the latter was unfolding amid the broader bull market, emerging market assets had always appeared to be more geared to the downside during sharp market corrections. Indeed, they have generally proven to be serial underperformers.

However, in the early part of 2016 this trend appeared to reverse. Markets plunged amid fears that the People’s Bank of China might devalue the renminbi again and in the wake of the US Federal Reserve’s modest rise in the Federal Funds Rate. Despite these ructions, key commodities, emerging market currencies, equities and  xed-income securities weathered this particular storm far better than was the case in previous set-backs. More often than not, market price behaviour is more eloquent about true investor positioning than surveys and fund- flow reports. Consequently, market price behaviour, an assessment of investor sentiment and  ows, forms one of the key elements of our core investment decision-making framework, Compelling ForcesTM, along with ‘fundamentals’ and ‘valuation’.

Correlation characteristics appeared to be changing in a stressed market environment, suggesting that the prices of metals and emerging market assets could be beginning a process of relative stabilisation or had actually reached their cyclical low points. Oil prices, however, suffered a further plunge at the beginning of this year, demonstrating an unusually high correlation with growth assets and in particular equity markets. However, oil has a unique dynamic due to the in uence of the cartel known as Organisation of the Petroleum Exporting Countries (OPEC). OPEC had kept prices abnormally high by constraining supply, which ultimately attracted investment in new technology and new entrants, effectively ending the cartel. With Opec no longer managing supply, the market price played this role and the oil market played catch-up with other global commodity markets.

The key change to fundamentals has been capacity cuts and supply constraint. Many market participants, as they often are, were simply ‘behind the curve’ because negative market momentum had taken over. But as the spectacular performance of gold mining stocks in the  rst quarter of the year illustrated so well, when the sellers have sold, it only takes a modest amount of buying to have a dramatic impact on the price. To the end of June, gold mining stocks, as measured by the Euromoney Gold Miner Index, were up an eye-watering 100%.

We took relative commodity-price and emerging market currency resilience in the face of equity and credit market weakness as a signal to start the process of rebuilding exposure to commodity-related and emerging market assets in general. We have resisted the siren call of simplistic relative valuation metrics for a number of years. It is worth remembering the advice of one experienced emerging market observer: “never buy the equities until the respective currencies have put in their lows”.

Resource stocks specifically, but emerging market assets more generally, tend to be highly cyclical and in our view, should be treated as opportunistic rather than a core exposure in a multi-asset context. In this era of constrained growth and returns, we can’t afford to ignore emerging markets and related exposures, which represent a large and growing opportunity set and more normal risk premia. But as investors, we should accept their inherent cyclicality and act accordingly.

Philip Saunders is co-Head of Multi Asset Growth at Investec.

 

In Defense of Sitting Tight

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In Defense of Sitting Tight

Earnings disappoint again, but markets stay resilient. With the U.S. party conventions out of the way and Hillary Clinton polling more strongly, investors may divert their attention, at least for a while, away from politics to focus on economic and company fundamentals.

If they do, will they subscribe to Republican presidential candidate Donald Trump’s view that they should follow him and sell out of equities?

Markets Have Been Remarkably Resilient
They’d have to reckon with just how resilient markets have been lately. Equities bounced back from Brexit at the end of June. They even sailed through July’s bear market in oil, which briefly slipped under $40 per barrel last week.

At the beginning of the year, the oil price was one of the major factors driving extreme risk aversion. This time, the impact has been muted. Even energy sector high-yield spreads are pretty much where they were when oil hit its recent high at the beginning of June.

Still, underneath these low yield-supported valuations the economy remains sluggish. As last Friday showed, the U.S. continues to post healthy jobs data. And yet the second quarter U.S. GDP print seriously undershot expectations at 1.2% real and 2.4% nominal growth. You have to go back to the first quarter of 2010 to find a report that weak. Household spending was strong and a lot of the weakness came from inventories being run down, but it wasn’t so long ago that economists were forecasting 3% real GDP growth for the second half of this year.

Three-quarters of the way through the second quarter reporting season, we can see that this is a tough environment in which to eke out earnings growth.

Another Weak Earnings Season
Year-over-year, we are on course for a 2% drop in earnings. Take out the energy sector and earnings are up around 2%-3%. That would be false comfort, however. A year ago, the consensus estimate for 2016 S&P 500 earnings per share was $130. Three months ago it was around $123. Now, we’ll be lucky to make $118. That was what U.S. equity investors got in 2014 and 2015, too; three years of flat earnings suggests this isn’t just about oil, but low investment across industry in general.

It’s a similar story in Europe. We’ve pointed to the quiet outperformance of European macro data over recent months, and both second quarter GDP growth and July inflation data came in ahead of expectations. Corporate earnings have been even weaker than in the U.S., however. We are looking at double-digit year-over-year declines for the second quarter.

It’s true that, if we strip out Europe’s banks, we might expect earnings growth of 3%-4% overall. However, stripping out banks in Europe is even more questionable than stripping out energy companies in the U.S. These banks lost a third of their value between the two stress tests of 2014 and 2016 and remain poorly capitalized, weighed down by nonperforming loans and overexposed to sovereign credit issues, which, in an economy as dependent on bank credit as Europe’s, is a serious impediment to growth.

Mixed Signals Create ‘Confused Apathy’
To sum up, the slight improvement in corporate earnings over the last couple of quarters cannot disguise how disappointing the figures are, given the easing off of the China, oil and, for U.S. companies, strong-dollar headwinds that we have been describing since the spring.

A phrase I have heard to describe investment psychology at the moment is “confused apathy.” Active managers struggle to generate alpha; beta looks tired, stretched and expensive; bond yields are incredibly low; the political environment is unpredictable. But wasn’t that what we were saying two years ago when the S&P 500 was 15% cheaper and earnings were exactly the same?

In other words, this is not an ideal way to invest, given the long-term, common sense correlation between earnings and market valuations, but ordinary investors that are patiently trying to grow their wealth arguably can ill afford to ditch equities, especially with bond yields so low. Monitoring risk is sensible, but trying to time this market makes about as much sense as, let’s say, building a wall around Mexico.

Neuberger Berman’s CIO insight by Joe Amato

Why Women Can Make Great Clients For Financial Advisors

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¿Son las mujeres clientes más rentables para los asesores financieros?
CC-BY-SA-2.0, FlickrPhoto: Ged Carroll . Why Women Can Make Great Clients For Financial Advisors

Working with female clients seeking financial advice is not always easy. They are more likely to be demanding, ask a lot of questions and mull things over for quite some time before making a decision. The good news, however, is that once a woman has gained an advisor’s trust she is likely to be far more loyal than her male counterpart. In our survey of 2000 French people, we found that 33% of women always speak with a financial advisor before investing. This compares with 26% of French men.

Women are better educated than ever before

Women’s role in society – and even in their own families – is changing. Educational levels have increased significantly in the last 20 years to the point where, in many western countries, there are now more girls graduating from high school than boys. According to the OECD, in the UK, one in two young women (aged 25-34) now holds a university degree. This is an historic high for the UK and higher than tertiary attainment rates in many other developed countries. In France, the comparable level is 47%, in Germany 31% and in the US 48%. In our survey, we found that 35% of female respondents had at least a baccalaureate compared with 31% of men. More men had higher degrees, but not many more: 12% of women had a master’s degree compared to 16% of men.

Who manages the household finances?

Traditionally, men have taken control of the family finances, but in our survey, 52% of French women said they were the primary financial decision-maker and 42% said they shared this responsibility equally with their husband. Only 6% said they left financial decisions entirely to their spouse.

A Pew Research Center study found women were the breadwinners in 40% of households with kids in the US. In the UK, the Institute for Public Policy Research found that a third of working mothers are the main breadwinners, an increase of about 50% since 1996.

In the US, the average woman saves more than her male counterpart and a study by the Family Wealth Advisors Council (FWAC) found that, at some point in their lives, 95% of women will be their family’s primary financial decision-maker. Already, US women control 51.3% of the country’s personal wealth.

Women largely ignored by the financial services industry

Yet, despite the enormous potential women hold as clients for fund managers and financial advisors, many reports find that the industry is still failing them. Heather Ettinger, co-author of the FWAC study, says that even though women are under increasing pressure to manage their family’s finances, 35% said they had no financial advisor and that when they worked with a financial advisor they were not satisfied.

A study by Fidelity investments found that when couples interact with a financial advisor, men are 58% more likely than women to be the primary contact. There can be dire consequences for the advisor if he ignores or belittles the wife. According to an Allianz Life Insurance study in the US (Women, Money and Power, 2008), about 70% of widowed women change their financial advisor within a year of their spouse’s death.

Women make profitable clients

Yet women can often make great clients for financial advisors because:

  1. Their levels of wealth have significantly increased
  2. Women now play a greater role in their family’s finances
  3. They tend to live longer than men and are more likely to inherit money or get a divorce pay-out that they will likely need help with to manage
  4. They are generally more loyal and profitable

A white paper by LPL Financial (‘Strategies for attracting and retaining female clients’) found that women tended to be more loyal and more profitable as clients because they stayed for long periods with advisors they trust. They are also more likely to refer business.

More female advisors needed?

Some argue that perhaps one reason for women’s current dissatisfaction with their advisor is that advisors are usually men. A white paper by Aprédia in France found that women managed only around 18% of independent advisor offices. Figures from Patrimonia (an annual convention for financial advisors in France) found that in 2014, only 14% of participants were women. US Census Bureau statistics from 2013 show that only 31% of financial advisors in the US were women.

How can advisors attract and retain more women?

There is an increasing amount of information and advice for financial advisors to help them gain the loyalty and trust of their female clients.

Justine Trueman is an executive in the International Marketing team at BNP Paribas Investment Partners.

The Fed Sticks to the Script (Yawn…)

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The Fed Sticks to the Script (Yawn…)

So, the Federal Reserve missed another opportunity to raise rates last Thursday.

I know what you’re thinking. Rates were never going up. We all know they’ll warn us for weeks before pulling the trigger—and besides, there was no press conference, and rates never change unless there’s a press conference.

But this is precisely the problem. The Fed’s script has become so predictable over recent years—and predictably wrong—that no one really listens anymore.

Listen to Markets, Not FOMC Members
Last week’s statement was no cut-and-paste from the month before. There was hawkish new wording about “near-term risks” having “diminished,” and “strong” job growth and household spending. But markets pushed Treasury yields down—the opposite of what one might expect. Fed Funds futures did raise the implied probability of a rate hike in December, but you needed a microscope to see it.

Since the bungled messaging around the Jackson Hole conference in August last year and the subsequent FOMC meeting in September, we’ve been urging investors to ignore what the Fed says and focus instead on what the market predicts it will do. Markets have proven better forecasters of how stalling productivity growth and the global economic slowdown would work their way into U.S. monetary policy.

This matters because, for central banks to maintain control, they need their messaging to be strong enough to lead markets.

From Mystery to Messaging
To understand how we got here, it’s helpful to go back to the summer of 1982, when I was a trainee at Salomon Brothers and Paul Volcker was in the chair at the Fed.

Things were different then, and not only in the sense that overnight rates were at 20% and inflation was running at 12%. Volcker’s policy was innovative, radical and aggressive enough to beat inflation and usher in the bond-market bull that charges to this day; but it was also non-transparent to the point of being mysterious. FOMC members didn’t drop hints on 24-hour news. We understood that short-term money supply was important, so we’d hang on that data once a week and T-Bill rates would gyrate wildly, literally by hundreds of basis points.

The 1980s Fed could shock markets into obedience, and it worked: By the time Volcker retired, inflation was at 3%.

The “great moderation” he bequeathed enabled Alan Greenspan to pursue a more measured approach. Part of that was introducing greater transparency and guidance. As a believer in efficient markets, his view was that he could mitigate market and business volatility by giving people more information.

But Greenspan’s ideological imperative grew into a necessity under Ben Bernanke and Janet Yellen. When interest rates approach zero and quantitative easing loses traction, messaging quickly becomes the only effective policy tool left.

And yet, the last time the Fed was able to rattle markets with its messaging was three years ago, when Bernanke set off the “taper tantrum” by warning of tighter policy on the way. Since then the Fed has raised rates once. If you cut your teeth in the Volcker era, that is pretty sleepy stuff. No wonder the markets have tuned out.

The Fed Will Need to Drop the Script if We Get Stagflation
That’s worrying. My hope is to see a Fed courageous enough to surprise the market again—and I suspect that circumstances may one day force the issue.

After all, the European Central Bank and the Bank of Japan still occasionally show us how it’s done. Last Tuesday was the fourth anniversary of Mario Draghi’s “whatever it takes” intervention—the ultimate in central bank policy-by-messaging. Its announcements in March this year approached those heights, too, as did the Bank of Japan’s plunge into negative rates.

That aggressive and shocking action was forced by the precarious states that Europe and Japan were in. The Fed, by contrast, has for too long been in too comfortable a position, with decent job creation and at least some growth and inflation.

With that in mind, last Thursday’s media comments from one of the leading characters in our story bear repeating. Alan Greenspan attributed slowing productivity growth to the impact of an aging society on entitlement spending, which he argued is crowding out investment. As long as politicians remain unwilling to address that, economies will continue to stagnate. At the same time, however, Greenspan warned about signs of inflation.

If Greenspan is right and we are seeing the beginning of an era of stagflation, the great bull market in bonds could be about to end, and the Fed may have to turn its focus back to inflation again rather than growth stimulation—and do things that are radical and aggressive enough to surprise the markets. How radical will it need to be to regain the market’s attention? Now, that is a good question.

Neuberger Berman’s CIO insight by Brad Tank

More Risk, More Performance? Not in Afores

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En Afores, más riesgo no necesariamente genera más rendimiento
CC-BY-SA-2.0, FlickrFoto: eatsmilesleep. More Risk, More Performance? Not in Afores

High levels of risk are associated with a higher potential or return, says one of the principles of investment. However, when you have the possibility to compare these two variables and put them among competitors in their historical performance, what comes out is that there are those who take an additional risk to a level of performance and that some people manage to, with a lower risk, be more efficient and get better results.

Among the Afores you can observe various risk profiles and investment styles. On the one hand, there are those who are mandated to be at the top even if it means taking an additional risk; others are interested in being above average; others just want to be in the average to avoid risk and others which are guilty of being conservative in their results.

Investments are dynamic and what worked yesterday will not necessarily work in the future. Therefore, investment areas have to continually reinvent themselves to improve results.

Yields are just part of the big picture. To see it complete, you need to add risk.  In this case, it will be expressed as the value at risk (as measured by the standard deviation of daily quotations which is multiplied by a probability value) to obtain the expected loss with a certain percentage of probability that in this case we place 95%.

Graphing risk and performance
To do this exercise we use direct returns (not annualized) of the basic Siefore 2 (SB2) which is the Siefore (Afore fund) which manages the largest amount of assets (36%), equivalent to 50 billion dollars. Additionally, it is focused on federal government and private sector workers whose age is in the range between 46 and 59 years. Therefore, 9 million workers are enrolled in these funds. 17% of assets are invested in equities and the fund has a weighted average maturity of 11 years at May 2016 according to data provided by CONSAR (regulator for Afores).

Three years were chosen because it has been characterized by significant volatility which has demonstrated the ability of the administrator in a changing environment. The Mexican government bond M23 (due in 2023) in the same period fluctuated between a rate of 5.20% and 6.64%, expressed in prices that has meant a change in the order of 10%.

Based on the standard deviation of historical prices of each of the 11 Afores Value at Risk (VaR) parametric 95% confidence interval was calculated. This means that in 95% of the days of operation, the maximum expected loss percentage is being calculated for each Afore. The parametric VaR is obtained by multiplying the standard deviation of prices period by 1.96%.

The balance between risk and return
Plotting risk (horizontal axis or “X”) and performance (vertical axis or “y”) it can be seen that the SB2 Coppel has been the best performing Siefore in the last three years (15.jul-13 to 14 -jul-16) with a VaR of 0.52%. In the graph a vertical line is added from Coppel’s VaR and some Afores are on the left and others on the right side. The left means lower risk and the right is higher risk taking with Coppel as a reference.

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The first thing that jumps out at us is that the SB2 Azteca with a degree of risk VaR near Coppel’s (VaR 0.52% of Coppel vs VaR 0.51% of Azteca), paid 4% less than Coppel.

The other point that draws our attention are the two extremes in terms of risk, where on one hand Afore Inbursa appears as the most risk averse (the left side) and Afore Invercap as the highest risk taker (the right side). Inbursa with a VaR of 0.18% paid 10.63%, while Invercap with a VaR of 0.79% had a 15.62% payment. Comparing Invercap with Coppel’s result, it can be said that the risk incurred by Invercap did not pay up, since with two-thirds of their risk, Coppel achieved better results.

In the graph it can be seen that Profuturo and Principal who are in second and third place performance in the period have a small VaR compared to Coppel (about 0.10%) and a yield of between 1.50 and 2% below Coppel. Also, these two Afores did a better risk management than Sura, Banamex and Metlife (in this period) which with a similar VaR had lower returns. XXI-Banorte who also has a VaR similar to this group, had the lowest yield for this level of risk. Their performance is in the second to last position (place 10 of 11) and with a difference of almost 8% vs Coppel. Finally, you have PensionISSSTE who is in position 9 of the 11 Siefores.

In long-term portfolios, exercises like this serve to see if the investment team is doing well or not (in hindsight). Additionally, prospectively, it is important to maintain a constant review of investment scenarios and an analysis of market expectations. In a second plane, it works to determine whether the distribution by asset class (within applicable investment regime) is correct and in a third plane, if the instruments chosen to invest in this asset class are suitable for generating the expected performance. Many times you can have the correct stage and distribution by asset class, but fail in specific assets, for this reason it is important to carry out this exercise routinely and to make the necessary adjustments in time.

Column by Arturo Hanono
 

China: A Transition Well Underway

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La búsqueda de rendimiento de los inversores favorece a los emergentes
CC-BY-SA-2.0, FlickrPhoto: Jean-Pierre Dalbéra . China: A Transition Well Underway

China’s first half macroeconomic data supports our view that the country is in the midst of a successful transition from a high-speed, heavy industry-based economy to a consumer and services-based economy, which, while decelerating, will remain the most important driver of global growth. We believe the challenges of continuing this transition will result in gradually slower growth rates and increased volatility, but the risks of a hard landing remain very low.

Winners and Losers in the Transition
To understand the trajectory of the Chinese economy, it is important to recognize that this economic transition is creating winners and losers. The services and consumption (tertiary) part of the economy, for example, remains robust and is now the largest part of the economy. This mitigates the weakness of the industrial (secondary) part of the economy, which is shrinking as a share of GDP.2016 will almost certainly be the fifth consecutive year in which the tertiary part of China’s economy will be larger than the secondary part, and the tertiary part is driving an increasingly larger share of economic growth. In the first half of this year, final consumption contributed about 73% of China’s GDP growth, up from a roughly 60% share in the first half of last year, and a 42% share for the full year of 2006.

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A Healthy Chinese Consumer
The most important actor in this ongoing transition is the Chinese consumer, and we are keeping a careful watch over her health. In the first half of this year, her vital signs were excellent, but we are aware that as she matures, she is slowing down a bit.

China remains, in my view, the world’s best consumer story, with inflation-adjusted (real) retail sales rising 9.7% year-over-year (YoY) in 1H16, compared to a 1.6% pace in the U.S. in June. But that does reflect a modest deceleration, from 10.5% a year ago, because income growth, while still quite fast, is moderating.

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 The Top Concern: Weak Private Investment
First half macro data suggests that the Chinese economy is stabilizing at a healthy pace, led once again by strong consumer spending and a hot (albeit somewhat cooler) housing market. My top concern is anemic investment spending by private firms: they are relatively profitable but are clearly not yet prepared to expand capacity or invest in more automation.

In 14 of the last 16 months, fixed asset investment by private firms—which account for about two-thirds of all fixed asset investment—rose more slowly than investment by SOEs. That trend, driven both by strong government spending on public infrastructure, which is channeled largely through SOEs, and by concerns about industrial overcapacity, reversed an earlier trend: prior to March 2015, investment by private firms rose faster than that of SOEs in 59 of the 60 previous months.

As the property market continues to cool and return to a more sustainable pace, a pickup in private sector capital expenditure will be important to preventing macro growth from decelerating too sharply. Overall, the Chinese economy is likely to continue on the same path as the last 10 years: gradually slower year-on-year growth with greater volatility, but there are no signs of a hard landing on the horizon.

Last year, China accounted for 35% of global economic growth, and if Brexit results in slower growth in the U.K. and anxiety in the developed West and in emerging Europe, the Chinese share of global growth could rise even higher. China—and the rest of the Asia region that Matthews Asia invests in, which (combined with China) accounted for about 60% of global growth last year—is likely to be considered a safe haven for investors, especially relative to European emerging markets.

Column by Matthews Asia written by Andy Rothman

Turkey’s Coup Attempt

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Turkey’s Coup Attempt

On July 15th 2016, a fraction of the Army mostly medium rank officers, had undertaken a coup attempt and seized airports, bridges, TV stations and military headquarters, before attacking the Turkish parliament, leaving the building charred and damaged, and have reasoned to seize power to protect the democracy from the Government.

A number of government officials, including President Erdogan and Prime Minister Yildirim, spoke to the media through FaceTime, saying the coup attempt was staged by military officers that are affiliated with Gulen movement. Prime Minister Binali Yildirim and Erdogan named the attempt as ‘uprising’ and perceived it as an attack to democracy.

Erdogan and the mosques called people to take to the streets and stand against the coup. People reacted strongly and took over the streets. Within a couple hours police forces took control and restored the order in most places. People walked on top of tanks and chanted against the coup. Also, several high rank military officers from different parts of Turkey strongly expressed their opposition against the coup and sided with the government.

The government and Erdogan claimed that Gulen movement to be responsible from the failed coup attempt, while Gulen movement rejects this claim and indicates they don’t even know the army forces who had undertaken the attempt, while also condemned the coup. The claim is that there will be High Military Council meeting during August 1-4, in which President Erdogan is expected to expel a group Gulen supporters from the Army.

On Saturday, July 16th the Parliament convened with an extraordinary meeting and all the members of parliament from the secular/social-democrat CHP (Cumhuriyet Halk Partisi), nationalist MHP (Milliyetci Hareket Partisi) and left-wing HDP (Halklarin Demokratik Partisi) opposed the coup attempt, and there were no one who supported.

Sadly, 200 people were dead and more than 1,500 wounded in the aftermath of the failed coup attempt and another crackdown on the group’s supporters has begun. More than 2,800 military personnel were arrested and more than 2,600 judges are laid-off and arrest orders for 140 Council of State members, more than 48 High Court of Appeals members and five HSYK (High Council of Judges and Prosecutors) members are released.

As expected, President Erdogan calls US to extradite Fethullah Gulen again while US officials requested for solid evidence that Gulen is involved in the coup attempt.

What could be the consequences?
The unsuccessful coup attempt will make President Erdogan more powerful now and Turkey is closer to presidential system. There are still question marks whether there will be early elections but the possibility increased significantly. AKP (Adalet ve Kalkinma Partisi – Party for Justice and Development) supporters were on streets throughout the weekend and it looks like the unsuccessful coup attempt would increase AKP’s popular support, which may also trigger the early election possibilities.

On the macro side, the failed coup attempt may have negative impacts on consumption and investment appetite and the struggling tourism sector probably will take another hit. After hitting above 3.0 levels against US Dollar, the Turkish Lira recovered of some of its losses during the weekend.

Deputy Prime Minister Simsek and the CBT (Central Bank of Turkey) Governor Murat Cetinkaya made conference call with the investors on Sunday evening and indicated that the Government has room in the budget and they don’t think there will be permanent negative consequences on the growth of the economy. The CBT also provided some measures to be taken to minimize the market impact. Accordingly, it was announced that the Central Bank will provide banks with needed liquidity without limits and the commission rate for the intraday liquidity facility will be zero. The bank further announced that market depth and prices will be closely monitored and all measures will be taken to ensure financial stability, if deemed necessary. The central bank is scheduled to hold a policy meeting on Tuesday, where the market expects no change in the policy rate.

Erdogan’s full stance and response when all the dust settles down will be more crucial than ever this time for the economy. In addition, the failed coup attempt showed that there cannot be a coup in Turkey anymore and paves away the concerns over any military intervention going forward.

Equity market impact looks inevitable at this stage with the political turmoil. Although the Deputy PM & CBT Governor made efforts to sustain confidence for the foreign investor community and the recovery in the TRY, equity market is likely to seen off to a negative opening.

Column by Erste AM written by Sevda Sarp